Sunday, December 12, 2010

Ethical Investors Engage Companies and Governments

Ethical and socially responsible (SR) investors and funds, through their powerful growing presence, are increasingly succeeding in engaging companies in the process of improving their environmental, social and governance (ESG) policies and actions. And they are proving adept in getting governments and regulatory authorities on their side as well.

However, for most SR/ethical funds, corporate engagement activities are a secondary function. But one new ethical fund deserves a mention as it makes its corporate engagement activities, and that is the primary activity, which approach could be one that other SR/ethical and conventional funds may adopt.

The fund is the Australian Climate Advocacy Fund with its mandate to specifically engage companies on their climate change issues. But what is also unusual about this fund—and breaking ranks with virtually all other SR/ethical funds—is that it does not employ any sustainability or ESG screens!

Instead, the Climate Advocacy Fund invests in, and seeks to engage, all of Australia’s top 200 companies (as in the S&P/ASX 200) in enhancing their climate change and ESG activities. In this way, the fund believes that by helping those companies do better on climate change, their share values will rise and increase the value of the fund.

But not applying screening is antithetical to SR/ethical funds. For most SR/ethical investors, it is heretical to buy stock in companies they prefer not to own, though there are some historical precedents. Often leading the way in this have been religious funds and associated groups with some specific cause they want to support.

For instance, in 2006, an article in the Christian Science Monitor, entitled, “The power of nun: taking a lead role in shareholder activism,” the article stated that, “the Bronx-based Sisters of Mercy bought stock in Synagro, a fertiliser pelletmaker with a plant in the Bronx, in order to lean on them to clean up emissions caused by burning New York City sewage in the pelletmaking process.”

In the US, a significant proportion of all proxy initiatives—stockholder proposals voted on at company meetings—are sponsored by religious organisations. Leading these fights in the US is the Interfaith Centre on Corporate Responsibility (ICCR). The “ICCR raises the prophetic voice of faith [on behalf of nearly 300 faith-based institutional investors] to change the way companies conduct themselves as good corporate citizens... In 2010, ICCR's members have filed 282 shareholder resolutions on social, environmental and corporate governance issues.”

An example of how successful the ICCR has been is the following: “an ICCR member-sponsored proposal requesting greater transparency around derivatives achieved an unprecedented 30 per cent approval by shareholders (typically, a shareholder vote in the double-digits is considered very successful) and went on to produce votes above 30 per cent at the AGMs [annual general meetings] of Bank of America, Goldman Sachs and JP Morgan.”

Among other successes that SR/ethical investors have had in engaging companies and regulatory authorities has been ‘say on pay.’ This is where stockholders get a vote on executive compensation, though it is usually non-binding.

Hence, together with the public outcry, SR/ethical investors and funds have now moved the US government and the Securities Exchange Commission (SEC) to act on say on pay.

The SEC is proposing “new rules to give all shareholders non-binding votes on executive compensation at the public companies they own. This regulation came out of the Dodd-Frank bill that was signed into law earlier in the year. Also proposed by the SEC were rules that required institutional investment managers to file with the SEC on how they voted for these new non-binding resolutions at companies they owned stock in for clients. The new disclosure will hold institutional managers accountable for their voting on such important measures.”

And with their growing influence, SR/ethical investors and funds have helped move the SEC to acquiesce in proposing that it should be made easier for shareholders to nominate directors to company boards. Though likely to happen, it was met with resistance from the US Chamber of Commerce, representing as it does, the status quo of many corporate boards.

SR/ethical funds and investors are also taking on the US Chamber of Commerce on another issue—corporate political donations. A press release dated November 4 states, “investors today announced the filing of shareholder resolutions at several corporations that sit on the Board of the US Chamber of Commerce, challenging their corporate boards to review their policies and oversight of political expenditures, especially through trade associations. The first four companies to receive this resolution are Accenture, IBM, Pepsi and Pfizer.”

SR/ethically oriented investors and funds are aided in their engagement efforts by research and proxy services of a number of key organisations. In the US, besides the ICCR, they include Institutional Share Services (ISS), RiskMetrics, and Moxyvote. In Canada, SHARE also performs such work. ISS and RiskMetrics assist in such activities globally as well.

In the UK, one of the largest firms engaging companies on ESG issues there is the hugely influential firm, Hermes—backed by Britain’s largest private pension fund, BT Pension Scheme (BTPS). They said that, “over the [second quarter of 2010]… we engaged with 183 companies on a range of 425 social, environmental and governance issues.”

In addition, the UK government on July 10 instituted the Stewardship Code, “[which] aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies,” says the UK’s Financial Reporting Council (FRC).

Furthermore, companies are realising that if they want their share prices high, they have to be considered ‘best-in-class’ companies on ESG issues by analysts. They know that making it into the respected Dow Jones Sustainability or the FTSE4Good indices, for instance, can mean higher stock prices and better public perception of them resulting in higher revenues. Hence, they are increasingly abiding and willing to engage SR/ethical investors on ESG issues.

In the US, the Social Investment Forum (SIF) reported on November 9 that US SR investment assets total a huge $3 trillion, while Eurosif said on October 13 that European SR investment assets have shot up to a mammoth €5trn. Clearly, the power and influence of SR/ethical investors and funds is growing enormously. From companies wanting to be seen doing the right thing to the most commanding regulatory authorities, all are now bowing to the increasingly authoritative and moral force of the SR/ethical investor.